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When hindsight isn’t good enough: compliance with the Bank Secrecy Act

FinCEN and the OCC’s recent settlement with First National Community Bank of Dunmore, Pennsylvania (FNCB) illustrates US regulators’ ever-increasing focus on compliance with the Bank Secrecy Act (BSA) and on the systems that financial institutions have in place to detect and report suspicious activity.

FinCEN and the OCC’s recent settlement with First National Community Bank of Dunmore, Pennsylvania (FNCB) illustrates US regulators’ ever-increasing focus on compliance with the Bank Secrecy Act (BSA) and on the systems that financial institutions have in place to detect and report suspicious activity. Combined with recent comments by SEC head of enforcement Andrew Ceresney about the perceived need to bring more stand-alone BSA enforcement actions when it comes to broker-dealers, the settlement underscores the heightened scrutiny that regulators are giving to potential BSA violations across the spectrum. The FNCB settlement also emphasizes the increasing attention regulators are paying to bank insiders, including board members, in the context of BSA enforcement actions.

On February 27, 2015, FNCB entered into a $1.5m settlement with FinCEN and the OCC. According to FinCEN, FNCB failed to identify red flags and report suspicious activity in accounts controlled by its then board member and a former state judge, Michael Conahan, another former state judge, Mark Ciavarella, and a corporation established by Mr. Conahan, during the period 2005-2009. Although the bank and the fine were relatively small in this instance, the conduct at issue is relevant for financial institutions of all sizes.

Mr. Conahan and Mr. Ciavarella were both sentenced in 2011 for their roles in a “kids for cash” scheme in which they misused their positions as judges and profited from sending juveniles to detention centers in which they had a financial interest. In its settlement with FNCB, FinCEN identified several red flags, including a subpoena received from law enforcement, that allegedly should have alerted FNCB to Mr. Conahan’s and Mr. Ciavarella’s illegal activity. FinCEN emphasized that the transactions at issue allegedly should have been identified as suspicious under FNCB’s own program. FinCEN noted that FNCB did not file suspicious activity reports until after Mr. Conahan pled guilty in 2009 and then only at the behest of an OCC examiner. The settlement illustrates regulators’ views regarding the importance of considering all red flags, including those contained in law enforcement requests, and of applying AML controls uniformly, including with respect to employees, senior management and board members.

Although limited to a relatively small number of transactions and a relatively small fine, this case illustrates the challenge financial institutions face in implementing and running compliance programs that may be evaluated in the wake of customer misconduct. The case emphasizes that regulators expect financial institutions to take a vast array of information – including information in subpoenas – into account when evaluating whether activity is suspicious. In recent years, regulators have imposed large fines on financial institutions relating to BSA violations. These financial institutions include Wachovia ($160m in 2010), MoneyGram ($100m in 2012; Thomas Haider, the former Chief Compliance Officer, was separately fined $1m by FinCEN), HSBC ($1.9bn in 2012), and JPMorgan Chase ($2.6bn in 2014). Given the increasing attention paid to potential BSA violations, we recommend that banks and other financial institutions examine their AML controls and consider the procedures they have in place for evaluating red flags.

Freshfields’ US Litigation Group has significant experience representing financial institutions in AML and other investigations by various US regulators and follow-on litigation. The Group includes several former prosecutors from the US Attorney’s office and Department of Justice who have successfully helped clients navigate complex matters with the government.